For First Time Homebuyers: When To Refinance Your Home

As a first time homebuyer, you'll surely be overloaded with emails, direct mail offers and even phone calls offering unbelievable rates to refinance your home - even as soon as you step in your new door. But before you are tempted by any "too good to be true" interest rates, make sure you understand what refinancing means and when it's a good time to consider it. Doing your research now, or even before you buy your first home, will put you ahead of the game in the home owning business and ensure that you keep your investment and your home equity in check.

What is refinancing?

Refinancing your home loan or mortgage is when you (the homeowner) take out a new loan from a lender (the bank). This new loan then "pays off" your old home loan and (hopefully) leaves you with a lower interest rate, a lower mortgage payment, or a shorter-term loan. In some cases, refinancing can be a wise decision for smart homeowners that are in control of their finances and understand their long-term investment goals. Other times, refinancing is just a quick way to get access to cash (from the home's already built-up equity) that can create a vicious cycle of lifetime debt and last minute lending for the owners.

Why do homeowners refinance?

If you've already got a great home at a great rate and are happy in your investment... you may be wondering what all the hoopla is about. But, if you are like many buyers that have a higher interest rate or higher monthly payment than they would like, refinancing can sound like a tempting solution for cutting expenses. These are some of the main reasons that homeowners refinance:

Lower interest rates

Shortening the length of the loan

Changing from an adjustable to a fixed rate

Quick cash

When is a good time to refinance?

Based on those tidbits of information, the "right" time to refinance is different for every homeowner. If you recently bought a home at a less than favorable rate, perhaps refinancing to a lower interest rate and/or shorter term will give you the long-term financial freedom you are hoping for. Or, when the market creates lower interest rates you may choose to change from your higher "fixed" rate to a lower "ARM" (Adjustable Rate Mortgage) - or vice versa. Another good time to refinance could be if you need a cash loan. If you are planning a large investment in your future and need that built-up equity, then betting against your house may be the right decision.

Doing your research first.

The key to any wise investment is of course research, especially when it comes to owning a home. As a first time homebuyer with little equity in your home, the thought of refinancing may seem like a faraway possibility. But as interest rates fluctuate, housing markets surge and crash, and life (in general) happens... it may be wise to prepare yourself in case an ideal refinancing opportunity arises. Things you can remain aware of to stay on top of the home owning game are:

Your appraised home value

Comparable home prices in your neighborhood

Current interest rates for the housing market

Home design and amenities that increase value

Exterior features and "curb appeal" that increase value

By having current knowledge of the market and your home worth, you'll know when it's a good time to refinance. Maybe you'll decide to cash in on your home equity and update your home. Remodels can be costly - but sometimes they can add much needed value to your home. Especially if you are planning to sell in the near future, keeping your home ready for potential buyers is key to turning a strong profit (or at least breaking even). If you are on top of current interest rates and see an opportunity to reduce your overall home debt - maybe it's time to refinance. Or, if an unexpected life event or investment opportunity leaves you needing a loan quickly - your home equity could save you in your time of need.

For every homeowner, the option to refinance will be for different reasons and on different terms. If you do the research before you buy your first home, you'll be ahead of the game. You might decide that refinancing is not right for you and can gladly toss out all that marketing junk mail as soon as it comes in. But, if you can bet the roof over your head that refinancing is the right decision for you... it's time. Happy home owning!